What is BRRR?
BRRR is a real estate investing strategy that stands for Buy, Renovate, Rent, Refinance (and repeat). The goal of the BRRR strategy is to purchase a distressed or undervalued property, rehab it to increase its value, rent it out to generate cash flow, and then refinance the property with a new loan based on its new higher value. (Psst! This allows the investor to take out their initial investment, and potentially even profit, while still holding onto the property as a long-term rental investment.
The BRRR strategy can be an effective way to build wealth through real estate investing, but it does require careful planning, due diligence, and execution to be successful. Follow along to discover what you should look out for before going through this. And if watching us discuss it is more your style, join us for the Not Your Average Investor Show.
BRRR: Understanding the Pros, Cons, and Risks in Real Estate Investing
The Pros of BRRR
In an ideal world, the BRRR strategy hits the 4 primary benefits:
- Build instant equity once you refinance the property.
- Generate immediate cash flow when you rent it out.
- Pull out money once you refinance to reduce your financial risk.
- Use your equity to roll into other properties and start the process all over again.
But what about in today’s economic climate? Does the same concept work?
Well, the success of the BRRR strategy heavily depends on multiple factors working out correctly within a short time frame, making it inherently risky. But it can be a successful approach, as demonstrated by JWB's own growth (we currently manage 5000 properties around the urban core of Jacksonville and have acquired them using the BRRR method, so we can confirm–it works!)
Cons of the BRRR
BRRR also has its downsides and risks, especially during financial crises. While it's an opportunity for you to get in with no money down or significantly less money down if you know what you're doing, you still take on the associated risks. The primary risk is uncertain conditions that you can't control such as appraisals. Low appraisals can be detrimental to the success of the BRRR method, causing delays or financial strain. The reason for this is that appraisals can be subjective and depend on the individual appraiser's judgment.
Appraisers' incentives may push them to undervalue properties in an uncertain market or the media's portrayal of the housing market may influence appraisers' opinions. The success of BRRR hinges largely on an increased appraisal, a low appraisal here can be catastrophic for a BRRR investor because it destroys the inherent equity that the BRRR strategy requires.
Risk of the BRRR
BRRR investors face heightened risks in the current real estate climate. As a new investor, you should be cautious when considering the BRRR method, especially trying to manage multiple projects simultaneously. You have the cost of the original purchase, the renovation costs, the appraisal number, and then eventually finding tenants to turn a cash flow. That's a lot of financial risk to consider and a lot to manage should anything go south. Here at JWB, we think the biggest risk to BRRR investing is appraisals coming in lower than they have over the last few years.
So how do you best mitigate those risks?
How To mitigate your risk in BRRR Investing
For starters, you should know that BRRR investing requires active investors, it’s not for the passive investor like a turnkey rental property. The BRRR strategy is a popular investing approach that requires careful planning, due diligence, and execution. To manage risks associated with the BRRR strategy, expanding private loans can be an effective option. On the other hand, passive investment options such as turnkey rental properties can offer capital preservation and a potential upside. During uncertain times, taking a defensive approach to investments can help you weather economic storms. However, during recessions, rental properties can be a smart and defensive play in the real estate market.
If you’d like to learn more, set up a discovery call with one of our team members and we can see if investing with JWB is a good fit for you and your investment goals.